Many retirees eagerly await the middle of October. That's when the Social Security Administration (SSA) will announce the cost-of-living adjustment (COLA) for 2025.
More money in your pocket is a good thing, right? Yes, but there's more to the story. Social Security COLAs come with an ugly secret that they won't tell you about. The increases, if any, will probably be too little and too late.
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Too little
Whatever the Social Security COLA is for next year, it probably won't be enough to offset your higher living expenses. The 3.2% benefit increase received in 2024 wasn't as much as retirees needed. Neither was the much greater 8.7% adjustment last year.
The culprit is the inflation metric the SSA uses to calculate annual COLAs -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W doesn't adequately capture the higher costs seniors incur, largely because it doesn't give a high enough weight to healthcare expenses.
How significant is this problem? The Senior Citizens League (TSCL) compared Social Security COLAs based on the CPI-W with what the adjustments would have been using a different inflation metric designed to reflect seniors' costs better. The organization found the COLA was lower than it should have been in seven of the past 10 years. Instead of a 3.2% adjustment this year, TSCL believes the increase should have been 4%.
SSA doesn't trumpet that the Social Security COLA doesn't always cover retirees' increased cost of living as much as it should. However, many retirees know it all too well. TSCL's 2024 Senior Survey revealed that 71% of respondents said their household costs increased by more than 3.2% in 2023.
Too late
The previous statement underscores another key issue with Social Security COLAs: The increases come too late to cover higher costs as they're incurred. This problem stems from the way COLAs are calculated.
Your 2024 COLA was determined by calculating the difference between the average CPI-W for the third quarter of 2023 and the average for the third quarter of 2022. One obvious downside of this method is that inflation could have been worse earlier in the year than in Q3. However, the main drawback is that retirees paid higher costs in 2023 but didn't receive the COLA intended to cover those higher expenses until 2024.
The good news (sort of) is that it could be worse. Until 1975, increases to Social Security benefits literally required an act of Congress.
But you're probably familiar with the time value of money. Cash received now is worth more than the same amount received months in the future. SSA doesn't account for this in its Social Security COLA calculation.
Is there any relief in sight?
Legislators and SSA are fully aware of this "ugly secret" about Social Security COLAs. Will they do anything about it? Maybe.
The "too late" part of the problem is unlikely to be resolved. However, two Democratic lawmakers, Rep. Ruben Gallego of Arizona and Sen. Bob Casey of Pennsylvania, have introduced legislation in the House of Representatives and Senate, respectively, that could partially address the "too little" part of the problem.
Gallego and Casey want to use the higher of the CPI-W or the CPI-E (an inflation metric designed to better reflect price increases for seniors) to calculate annual Social Security COLAs. Their legislation probably won't pass this year, but it's possible that a similar idea could be included in future Social Security reforms.
What can retirees do until then? Most importantly, be aware of the limitations of the Social Security COLA. Watch your spending as closely as possible. Voice your opinions to your congressional representatives on what Social Security changes you think are needed. There's one thing that's definitely not a secret in Washington: Politicians want to be re-elected.
